The vast majority of defined benefit schemes will be offering members below-inflation increases, new analysis from Broadstone has shown, a fact rising in importance as the cost-of-living crisis continues to bite.
According to the pensions and employee benefits consultancy, only one in 10 schemes provide uncapped increases in line with inflation, while the majority will provide uplifts below the 6.7% CPI figure for the year to September 2023.
More than two thirds (68%) of schemes provide inflation increases either via CPI or RPI that, for the vast majority, are typically capped at 5% for post-1997 benefits. For benefits accrued before 1997, 31% of schemes have capped inflationary increases and a similar number (32%) have fixed increases. One in five schemes (21%) do not have any indexation on these scheme benefits, Broadstone said.
In contrast, the State Pension benefits from an uncapped triple lock, which will see this year’s pension increase by 8.5% in April.
David Brooks, head of policy at Broadstone said soaring inflation has brought the topic of defined benefit indexation back into the spotlight.
Brooks said: “It is clear that the majority of schemes will be uprating member’s benefits below the September rate of inflation given the prevalence of 5% caps. It is important that members are aware of how their benefits will be impacted in April so they can budget accordingly and don’t receive any nasty surprises.
“What makes this issue more complicated for schemes and trustees is that the cost-of-living crisis has coincided with significant funding improvements for DB schemes leading to calls for discretionary increases for member benefits.”
Brooks said members believe pension schemes could reasonably afford to grant a one-off uprating to help payments keep pace with inflation. However, he warned that ‘heads I win, tails you lose’ has put a large strain on employers to invest in these pension schemes over many years.
“Providing greater than agreed increases is not something that employers should be compelled to do although we understand the pensions minister is mulling on this area. Other than introducing some upside sharing for the distribution of a funding surplus from the recent consultation, it is unlikely there will be a legal way to help members,” he added.
